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Couples facing divorce may want to explore a relatively new option for legally ending marriage in Texas called collaborative divorce. This approach emphasizes cooperation over confrontation, and problem-solving over grievance-airing. It was developed as a way to minimize conflicts and the emotional anguish of a traditional divorce process, especially when children are involved.
In a collaborative divorce, each spouse is assisted by a lawyer so they have the benefit of individual counsel. The divorcing parties and attorneys agree to cooperate fully in providing full disclosure of all financial information, and to produce whatever documentation is requested by the other party. The attorneys commit in writing to act honestly and professionally, and to treat the other attorney and client with respect and dignity.
All negotiations take place during four-way meetings with both parties and their lawyers, and sometimes other professional experts. Attorneys draft legal documents, guide settlement meetings and strategize with their clients. Frequently, a divorce financial analyst like myself, is part of the team and becomes a neutral financial professional in order to help work out the nitty-gritty of the monetary settlement. The neutral financial professional is crucial when the parties have substantial assets, providing an unbiased view of the financials. The financial professional also provides the team with tools to clarify the couple’s financial situation — creating spreadsheets, charts and graphs that are often very useful in illustrating the big picture in black-and-white.
In practice, the concept of the collaborative law used in divorce is the opposite of almost everything typical divorce attorneys have been trained to do. It requires a definite shift in an attorney’s mindset and methods to successfully handle a case collaboratively. The differences between collaborative divorce and a typical divorce can be profound.
In the collaborative process, while couples may not always agree on everything, they are encouraged to try to understand each other’s needs, interests and point of view. This is designed to enhance trust, reduce hostility and facilitate a settlement that works for everyone.
The collaborative divorce process is designed to provide more privacy, client control, and transparency; this process also strives to minimize post-divorce conflicts and aids in preserving family relationships, protecting the children, and allowing creative settlement solutions.
In order for this approach to be meaningful, effective and fair, both spouses should have relatively equal “bargaining power,” and should not be overly emotional, angry, fearful or intimidated by the other. This option also may not be appropriate for the mentally or emotionally incapacitated, or anyone struggling with substance abuse or domestic violence. In addition, full disclosure is required and both individuals must be fully informed of all relevant issues – i.e. legal rights, assets and liabilities, etc.
One significant drawback to the collaborative approach occurs if the process breaks down and the couple cannot agree on a settlement. Both collaborative attorneys who worked on the case must withdraw and each spouse must hire a new attorney — essentially going back to square one. This is likely to prolong the divorce process and increase costs.
Negotiating an equitable divorce agreement can be complicated. There are many issues to consider. In my experience, an often neglected or overlooked area is the insurance needs of both individuals, post-divorce.
Both individuals will likely need medical, automobile, homeowner’s/renter’s, life and ideally, long-term care insurance. And if there are any children involved, their insurance needs should also be closely considered.
The crisis in medical insurance coverage in the United States continues to be a political hot potato. Just as millions of Americans were settling into plans and coverage under the Affordable Care Act (ACA), another presidential election has turned this entire issue upside down once again. And at this writing, no one knows what will happen next as the Congress debates repealing the ACA. For this reason, I am recommending that those who stand to lose their medical coverage after divorce because they were covered under a spouse’s plan, sign up for a COBRA extension with their spouse’s healthcare insurance provider. Under Texas divorce law, this will offer medical coverage for up to 36 months following divorce. Now, COBRA can be expensive, so make sure you consider this as part of your settlement agreement, if possible. The 36 months should give you ample time to secure a job for yourself that offers medical insurance.
Minor children must be covered under Dad’s medical insurance. If mom’s coverage is best, then the cost of that coverage is added to the child support payment.
Addressing the possibility that you could require long-term care is an important part of retirement planning. Yet, too many people hope for the best and don’t give this much thought. Our rapidly aging population, lengthening longevity and unpredictable health care costs highlight the need for long-term care insurance. So, couples getting a divorce should definitely explore getting long-term care insurance.
Statistics show that 70 percent of those who reach age 65 will need long-term care at some point before they die. In addition, many people should realize that Medicare does not cover long-term care. And Medicaid only kicks in when you’ve exhausted most of your assets. It is also quite possible that these two institutions may also face changes under the current administration.
For these reasons, considering some method of long-term care insurance or savings has become a key strategy for preserving assets, especially for women. So, adding a line item in your agreement for this coverage might be worth fighting for. Also, do your homework on plans, features and companies; read and understand the fine print of policies; and choose a reputable company.
For those who haven’t yet bought a long-term care policy, keep in mind that premiums for long-term care insurance increase as you age. And since there is a discount for purchasing while married — no one checks to see if you remain married — it is in your best interest to establish coverage prior to a divorce settlement.
If you are considering divorce in 2017, you are probably dreading the approaching holidays. Let’s face it, no one wants to acknowledge marital discord when the theme is “joy” and “good cheer.”
As the New Year approaches, you may want to consider focusing now on preparation and planning for what lies ahead. Here are some steps you can take before and during the holidays that will lay the ground work for a more productive process. If you simply don’t have time or can’t face the prospect of divorce now, do what you can and keep this list handy for action when the holidays are over.
- Set a budget for gift-giving; avoid creating new debt or spending down savings.
- Begin gathering and making copies of all your household financial documents for the discovery process. Consider getting a credit report on yourself and your spouse.
- Take photographs of everything in your house, inside the closets, drawers, the garage and even your safe deposit box, and date each image. Take extra care in photographing valuable collections, if accessible. Store the images in a safe location, possibly online. If items start to disappear as you move through divorce, you have a record of the items.
- Reach out to old friends and those with whom you have lost contact. It’s time to start rebuilding your social connections and network.
- Consider engaging a certified divorce financial analyst to help you prepare for the often complicated financial side of divorce. He or she is specifically trained to help you compile a list of assets and debts, get answers to financial and tax questions, consider equitable settlement arrangements and develop a realistic post-divorce budget.
- Practice self-care. Schedule a massage or a pedicure/manicure. Take walks or try yoga. Meditate. Watch your diet and alcohol consumption. Staying healthy will help you make better decisions in the weeks and months ahead.
- Every day, write down one thing for which you are grateful and why. If you keep the list on your computer, it’s easy to update each day. This will help you maintain perspective and a more positive attitude.
Put the divorce on the back burner during the holidays, if you must. But remember it is still simmering there and will soon require your full attention. Keep up appearances, but take care of yourself and start preparing for what lies ahead. You want to be ready to proceed on your path to becoming a healthy, well-adjusted single in the New Year.
If you are beginning a new chapter in your life with a spouse or partner, jointly managing your money may be the last thing on your minds. But it should be one of the first things you both consider as you begin to direct your separate finances into a financial plan for the future.
Depending on your ages, here are two lists of financial areas that need attention as you begin to plan your life together. I would advise focusing on the A-List first and then, tackling the B-List.
- Creating a household budget
- Bank accounts
- Housing Options Analysis
- Saving for retirement or other goals
- Insurance needs analysis
- Debt management
- Educational funding analysis
- Income tax planning
- Long term planning (20-year spreadsheet)
- Estate planning
- Long-term care insurance
- Real estate investments
- Social Security
A significant, initial financial consideration will likely be determining where you are going to live. What with today’s low interest rates, buying a house may sound like the best option, yet careful consideration of this option is important. This purchase is a very large investment. Compare the costs/benefits of renting as opposed to buying.
Do you have enough cash for a down payment — usually at least 20 percent of the home’s cost? Can you qualify for a mortgage loan based on your credit history and income level? Also, consider each of your careers: do you anticipate or is it possible an employer could move either of you to another city, state or even overseas in the near future? Are you planning a job change, or will you be starting a family soon? What’s the real estate market like in your area — is it a seller’s market, or a buyer’s market? Do you fully understand all the costs of home ownership — mortgage payment plus property taxes, insurance, maintenance and repairs, utilities, association fees, etc.? Even if you can potentially “afford” a home purchase, will you end up being “house poor” and short on savings?
By working with a Certified Financial Planner like myself, couples can get answers to these and other questions, as well as develop a comprehensive and realistic household budget which will provide them with a foundational tool for effectively managing their financial future and meeting their goals.
For more information on planning your financial future with a spouse or partner, visit my new website, http://www.moneyandmatrimony.us.
If you and your spouse are considering, or are in the process of divorce, and one or both of you has a corporate or civil service pension, understand that all pensions are not created equal. And, that fact is extremely important to consider as you proceed, hopefully, toward an equitable division of your marital estate.
In dividing these benefits in a divorce, your attorneys will likely draft a QDRO document, or Qualified Domestic Relations Order, to initiate payment(s) to either or both of you from these plans, depending on your mediated settlement agreement (MSA) and/or divorce decree.
The federal government requires some unique wording to be used in QDROs drafted with regard to civil service pensions. And the specific requirements can get complicated quickly. Often, divorce attorneys are not trained in this area, and couples or individuals could end up redoing the QDRO several times to “get it right,” if not completed correctly in the first place. As mentioned previously, there are several unique aspects to consider when drafting the specific wording of a QDRO when civil service pensions are involved. Here are some to be aware of:
The following four areas of a civil service pension must be addressed separately in the QDRO: any Retirement Annuities, lump sum payments, Survivor Annuities and Thrift Savings Plans.
While a corporate pension is normally a stable payment for the lifetime of the individual, a civil service pension has an inflation adjustment tied to the consumer price index. This means the individual with the civil service pension stands to get more money over the long-term.
In one divorce case, the wife, a teacher had earned an annual $50k TRS pension; her husband, an annual $75k civil service pension, based on his years with NASA. The wife was adamant that she receives one-half of his pension and he receives one-half of hers. This way she could participate in the cost-of-living adjustments that were offered by the husband’s plan. She was wise to request this method of handling the pensions, since the TRS pension provides limited cost-of-living adjustments.
In a corporate pension plan, the decree or agreement incident to divorce must clearly state the percentage going to the non-employee, and an “as of” date. However, civil service requires much more detail in the decree and MSA, so that those two documents and the QDRO agree on treatment of the pension at death and other issues.
In instances like those described above, my advice would be to secure the assistance of a certified divorce financial analyst (CDFA) to help in drafting QDROs so that all specific requirements are met. Better yet, engage the CDFA early in the divorce process so you can start working out the civil service QDRO details before the MSA and/or divorce decree is signed.
Join me at upcoming 2017 Guide to Good Divorce seminars in Houston on January 28, April 29, July 29, and September 28. Click here for more information on divorce financial planning or divorce mediation.
If you are facing divorce, a significant issue will be determining what is your separate property, what is your spouse’s separate property, and what is community or marital property. This is because family courts in Texas only have jurisdiction to divide what is considered marital property between the parties according to state divorce law. The courts in this state also have jurisdiction to set aside separate property to its rightful owner in divorce cases.
Separate property would include anything you owned prior to the marriage — real estate, investments, retirement accounts secured before your marriage, furniture, cash, personal belongings, jewelry, vehicles, antiques, collectables, etc. If any of these items has increased in value during the marriage, the increase in value remains your separate property. That is why keeping excellent financial records, receipts and documentation is very important to prove separate property and its value at the time of marriage.
Generally, marital property is property acquired during the marriage, even if this property is not specifically titled in both spouses’ names. Yet, there are exceptions to this. It is important to consider how the property was acquired during the marriage when determining if it is marital.
Here are some assets that are considered separate property by Texas law even if acquired during a marriage: an inheritance in the form or cash or property, proceeds from a lawsuit involving you as an individual, and gifts or bequests to you during the marriage from your spouse, friend or family member.
Things get murky, however, if you mix or co-mingle separate property with marital property over the years. This is called “transmutation of property,” meaning that non-marital property may be transformed into marital property. However, if a paper trail exists in the form of account statements, for example, a certified divorce financial analyst or a forensic accountant may be able to trace or track where the separate property begins and ends. These financial experts also can calculate how much your separate property has appreciated.
My client, Mary, was blessed over the years by a generous mother, who made yearly gifts directly into mutual funds held jointly with Mary. Over the 34 years of marriage, Mary pulled funds out to support the family as needed to supplement rather meager earnings of her husband. Hundreds of times, dividends were reinvested along with capital gains distributions. Upon her mom’s death in 2011, the accounts became entirely Mary’s (and partially her husband’s).
Mary and her husband assumed that the accounts were too mingled to ever separate. However, with 1,000s of pages of historical statements provided by Fidelity, Merrill Lynch, Templeton funds and others, we pieced together a financial puzzle through tracing.
Starting in 1987 with the first gift by mom, I did “line-by-line” tracing, entering every transaction, every buy, sell, dividend, capital gain, withdrawals, etc. As the puzzle was assembled, the picture became clear, showing accurately the amount of community shares and separate property shares. We were able to show that over 95 percent of the funds were Mary’s separate property.
Why such a high percentage when so much was earned in dividends and interest that is community property? Because of a rule in Texas called “community out first.” Whenever there are community shares or cash held in the account and a distribution is made, that distribution comes first from the community portion, then is supplemented by separate if needed. Due to the 100s of thousands of dollars in distributions and liquidations, the remaining mutual funds were almost entirely hers.
For the IRAs funded by Mary’s mom, the results weren’t so one-sided. Since there were penalties and taxes for early withdrawal, the community portion wasn’t withdrawn. The continual reinvestment of community dividends into new shares and the continued capital gains divided between community and separate, resulted in 24 percent of the account being community property. Due to the excellent records kept, and our tracing efforts, Mary had a real accounting of the finances that could be proven.
In Texas, a house purchased during marriage is considered marital or community property, therefore subject to division in a divorce. Even if only one spouse’s name is on the deed, the other spouse still has an interest in the property due to community property laws.
If one spouse owns a home prior to marriage, the home will always be considered that spouse’s separate property in a divorce, unless the new spouse’s name is added to the title/deed at some point after the marriage. Adding a spouse’s name to a home’s deed (if the home was purchased before the marriage) would not incur a gift tax, since there is unlimited gifting allowed between spouses.
A case for reimbursement to community
But, what if a home previously purchased by one spouse becomes the family residence when the spouse gets married and it is then remodeled or improved during the time the married couple lives in the house? These improvements would be funded from community income, so the value of the separate property asset has been enhanced.
Because all earnings during a marriage are considered community, there would be “a reimbursement due to the community” should a couple divorce. This means the value of the home would have to be traced back to the date of the couple’s marriage and then compared to the present day appraised value in order to calculate how much value the enhancements have made to the home.
Should one individual provide a down payment from their separate funds (money on hand prior to marriage), that spouse may be able to claim the home as his/her separate property if divorce occurs. If both spouses contribute toward the down payment, then they could each own a share depending on the proportionate amount contributed.
However, in some cases, the separate property down payment is simply reimbursed if there is a divorce.
Ensuring both names of married couples are on the deed to the family residence is the optimum solution for ownership and shared responsibility. Owning jointly also protects the surviving partner in case of death.
Under Texas law, a husband or wife has the right to remain in the homestead until their death upon the death of a spouse. Of course, he or she still has to pay the household expenses except for the principal portion of the mortgage payment and the homeowner’s insurance. But, even if the home is left to children from a prior marriage, the spouse has a right to remain in the home until his or her death.
Some further questions:
Q.1. What if there is a mortgage on your home, you get married and continue to make the payments?
- 2. Yours and your spouse’s income is considered “community,” so both of you are paying down the mortgage with community income. Both spouses have an interest in the home’s current value in a divorce.
Q2. If a couple divorces, would the community (both spouses) be due a reimbursement for the buildup of equity?
A.2. Yes. You simply need the mortgage balance on the date of marriage and the mortgage balance on the date of divorce in order to calculate this reimbursement. A certified divorce financial analyst can help with this and other calculations.
Every married couple or individual should set up comprehensive financial files that include all receipts and statements with regard to major purchases, assets, debts, property and the family home. This file should include bank statements, investment records, credit card statements, tax returns, refinancing documents, and all closing documents on a home sale, appraisals, mortgage statements near the date of marriage, and receipts for all improvements made.
The divorce process today is very different from the divorce process of a decade ago. In the greater Houston area, for example, family courts now require that all couples seeking divorce try mediation before going to court. And there is no rule that says each spouse must hire an attorney first before initiating that mediation process.
In fact, some couples are finding it advantageous to begin the divorce process by first hiring a specially trained mediator, or a Certified Divorce Financial Analyst with mediation experience, to do the heavy lifting of working out the divorce settlement details. In some cases, the divorcing couple hire the divorce attorneys to function more like consultants along the way until a agreement is reached and finalized.
Divorce mediation typically takes the form of two basic approaches — Caucus Mediation and Early Intervention Mediation.
Caucus mediation, the most common form of mediation, is structured where each spouse is in separate rooms with their respective divorce attorneys and financial experts. A mediator, frequently another family law attorney, goes between the two rooms shuttling proposals, explanations and impressions back-and-forth. Mediators cannot provide legal advice. Their primary job is to facilitate a settlement agreement between the spouses. About 90 percent of divorce cases reach settlement in mediation.
Early Intervention Mediation is different and relatively new. Both clients are in the same room, likely at a round table. Attorneys and other professionals may or may not be present. Clients and the mediator discuss alternatives, look at possibilities and potential results, and explore alternatives to configuring asset divisions both clients can agree on. The Mediator may or may not be an attorney, but cannot represent either party or offer legal advice. Attorneys can be consulted by phone, if not present in the room, for answers to legal issues. Mediation usually lasts only about four hours per session, typically settling all issues if they have worked with the Certified Divorce Financial Analyst first. The success rate for Early Intervention Mediation can be as high as or higher than Caucus Mediation.
Early Intervention Mediation also can be less expensive if attorneys are used only as consultants during or between mediation sessions, and as drafters of documents after the settlement agreement is reached. This form of mediation works best when both spouses are well informed about their property, debt and expenses.
Early Intervention Mediation also honors the couple’s belief that they can work out the division of their property with the professional help of a mediator for the welfare of their children, and complete their divorce in a way that preserves good family relations in the future.
However, this form of mediation may not work well for all couples. For best results, those who chose this form of mediation must engage mediators who are well-trained and experienced in this type of negotiation.
Contributed by Pamela A. Schied, a client of Patricia Barrett’s services
Going through divorce is one of the toughest things I’ve ever done. But like most crises in life, once you go through it, you can look back and appreciate all the things you learned about yourself in the process. You also want to share your insights with others in the hope that you can help. It’s not that I did everything right, by any means. But I did make a few decisions that turned out to be extremely valuable to me. Perhaps what I learned can help you.
One smart thing I did was to hire Patricia Barrett, a Certified Divorce Financial Analyst. My divorce attorney (another good choice) highly recommended I meet with her to discuss any financial concerns I may have regarding the divorce.
Now, I’m no dummy
I hold a master’s degree and am a self-employed consultant with several decades of professional experience under my belt. But divorce had me up against the ropes. To see my 13-year marriage reduced to an itemized spread sheet of assets and debts was shockingly emotional for me and overwhelming. I turned to a therapist to help me sort through my anger, sadness, resentment and disappointment. But the finances? That I quickly turned over to Patricia.
At our first meeting, I knew I’d made the correct decision. The things I learned in that one meeting, easily paid for her fee as she steered me away from financial missteps and advised me to focus my attention on key priorities. Her unique knowledge of divorce law and how my finances would be impacted short-term and long-term by my divorce settlement became the foundation of our efforts.
We started by running through my current household budget for my spouse and myself. Then, we developed a post-divorce budget for just myself — my income, my expenses, etc. In divorce, you aren’t just splitting expenses and income in half. You’re really setting up two separate households — so the costs will be higher than you might believe!
Talk about a reality check!
She then put these numbers into her proprietary tables. These are unique spreadsheets based on formulas that allowed us to evaluate the income and expenses going forward; we could now run scenarios of how the divorce settlement would impact my lifestyle and my savings — immediately and several years out — all the way through retirement. Talk about an epiphany — or more like a major reality check!
We also worked together with my attorney to review these numbers and determine/evaluate settlement offers. As I learned, a dollar in the value of a family home is not the same as a dollar invested in a 401(k) account. The precise way marital assets are divided in a divorce settlement makes a huge difference in the short- and long-term outcomes for both spouses.
It truly pays to get the best experts on your side of the table to advise you. Patricia and my attorney also debunked numerous myths about divorce Patricia, her tables and her knowledge and experience turned out to be extremely valuable to me, and as it turned out, to my former spouse to some extent, during our mediation process.
As we shuttled offers back-and-forth to my former spouse and his attorney, Patricia would quickly plug in offers and print out results for myself and my attorney to review. I knew immediately how it would likely play out in my immediate and long-term financial picture. Then, we would make a counter-offer based on what we saw. Before long, my former spouse began asking to see the spreadsheets for himself!
Having the numbers there in black-and-white was priceless!
It was amazing to watch how much my finances could be impacted by a few percentage points here or there. I know we could have never completed our mediation process in one day without Patricia and her tables and the expert advice I got.
A big question for me to Patricia was: can I afford to the keep the house if I stay self-employed? Or, will I need to go back into corporate to pay the mortgage? Believe me, I was in no shape emotionally or otherwise to “do the math” myself by this time. Thanks to Patricia’s post-divorce budget and her tables, I had the answers I needed to reach my goals — what income level I needed to be at or what items in the budget would need trimming.
I can’t say enough about Patricia’s calm focus and expertise helping me manage the process and focus on my strategy throughout. So, a word to the wise, find and lean on the expert help you need: a therapist, lawyer and financial advisor! The investment is well worth it for your peace of mind, not only during the process, but when it’s completed.
Over the years, I am often asked to help divorcing individuals track down potential assets of their spouses during a divorce. It is always an arduous job, sifting through files of paper records to find irregularities during discovery — pouring over piles of bank statements, credit cards bills, tax records and lots and lots of paper receipts. In the past, I have had to rely primarily on traditional tools of the trade and experience to sniff out hidden monies, property or businesses strewn along a paper trail. Thanks to technology and online resources, this part of my job has gotten easier.
Often, uncovering mischief or lies just takes basic electronic detective work. Free public databases, such as those tracking real estate deals, often provide information on spouses who are less than honest. For example, one of my client’s husband had disclosed 11 rental properties as community assets. However, with online resources, we were able to located two additional properties not on his list.
Tax returns also provide a wealth of information for the trained eye. I have found offshore accounts, partnership interests, and bank and brokerage accounts previously unknown by the other spouse. In one of my client cases, I found that the husband had essentially “stashed” $80,000 with the IRS in overpayments that he could have pulled out after the divorce was final.
Another area that I thoroughly review and investigate are paystubs and other employee records that may reveal undisclosed company benefits. “Restoration” plans may be overlooked by the spouse and attorneys who typically focus on 401(k) and pension benefits. If an executive earns above $25565,000 annually, the IRS rules state he or she must stop contributing to a qualified plan — 401(k). However, that executive may have an option to contribute to a “restoration” or “top hat” plan which may go unnoticed. Legally, these funds are still considered community property that must be included in the list of marital assets.
Spouses are also doing basic detective work themselves these days by browsing online social network sites, and the history of the family computer, where they are finding things like visits to bank websites where the couple doesn’t have an account. Many online social media site searches on Google, Linkedin, Twitter and Facebook are legal.
I do advise clients to be aware of laws that make hacking into a smartphone, secretly installing GPS on a spouse’s car, or installing keystroke monitors on someone’s computer potentially illegal. Depending on the state and the details surrounding how the data is acquired, there are still gray areas about what practices are acceptable.
Remember, the best defense in these matters is a good offense. As a married spouse, you have a legal right to know all the details of your community property and finances, and should always strive to understand what is going on in this area. Knowledge truly is power!
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Patricia Barrett CFP CDFA
Address: 10777 Westheimer, Suite 1100, Houston, TX 77042